ARMY PUBLIC COLLEGE OF MANAGEMENT & SCIENCES(APCOMS)

BUSINESS ECONOMICS PROJECT

MBA 19 A (Group 1)

BUSINESS ECONOMICS PROJECT

SME s OF PAKISTAN & ROLE OF STATE BANK OF PAKISTAN VIS--VIS SMEs

Presented To: Mr. Numair Ahmad Sulehri

Presented By: MBA 19 A (Group 1)

GROUP DETAIL

SERIAL # 1.

ROLL NO. 1900036

NAME Qaiser Abbas (GL)

PARTICIPATION DETAIL Acknowledgement, Executive

Summary, General Information & Data about SMEs, and Role of SBP. 2. 1900039 Miss Musarrat Naveed Steps and Actions by SBP in the Assistance & Development of SMEs. 3. 1900043 Miss Zakia Bibi Problems Faced by SME Sector in Pakistan. 4. 1900047 Muhammad Atif Shahzad Vetting & Printing of Document.

TABLE OF CONTENTS
CONTENTS Acknowledgement Executive Summary Part - 1 SME Sector SME Definitions State of SMEs Significance of SMEs Part 2 Role & Actions of SBP to Boost SMEs Prudential Regulations for SMEs SME Finance Department of SBP SME Booklet Issued by SBP The SME Bank Profile The SMEDA The Role of SMEDA SME Policy Objectives of SME Policy Part - 3 Problems Faced by Pakistans SME Sector The Risk Aversion of Commercial Banks The SBP Data on SME Lending (Conclusions) References and Sources 22 24 25 26 6 8 9 11 12 15 16 20 21 1 1 4 4 PAGE NO. i ii

ACKNOWLEDGEMENT In the name of Allah, the Compassionate, the Merciful. Indeed, Business is the best of all professions. (AL-HADEES)
First of all, all praises and thanks are to Almighty Allah for granting us the will, strength, and opportunity of educating ourselves on one, amongst the most important, subject of our countrys prosperity and development. The task of writing this document was given to us by our instructor Mr. Numair Ahmad Sulehri. Indeed, from educational point of view, there was a need for such study especially when it is desired to understand the various roles and functions of the State Bank of Pakistan. The students of Group 1 MBA 19-A, have found it extremely useful in understanding the working of this institution. This paper has enabled us to understand the multi-dimensional nature of the SBPs work and the importance of its different departments and their particular sphere of work within the overall setup. . The students in general with interest in economics would also find it an informative piece of paper on the SBP and SMEs of our country. Obviously, such kind of work couldnt have been possible without the kind guidance and instructions of our respected instructor Mr. Numair Ahmad Sulehri, for which all members of Group-1 MBA 19-A, feel indebted to him. A very obvious fact is that no analytical paper is the outcome of a single mind, and therefore, this document is also an outcome of a dedicated team work in which every member of the group has put in his/her sincere efforts. While preparing this document in its present shape, a number of people extended their help, we wish to thank them all. document vetted and printed. We owe special thanks to Mr. Muhammad Atif Shahzad for providing moral and logistic support and for getting this

November 21, 2011

Group-1, MBA 19 A

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EXECUTIVE SUMMARY
This document attempts to present, in a general manner, a brief introduction to the Small and Medium Enterprises (SMEs) of Pakistan. However, at the later stage, the primary focus of this document will shift towards the efforts made by the SBP in collaboration with the Government of Pakistan vis--vis the growth, development, and regulation of SMEs. The methodology adopted in this paper is simple. First of all, in Part-1, the SMEs in Pakistan are discussed in accordance to the parameters given above. In Part-2 of the paper, the role played by the State Bank of Pakistan in collaboration with the Government of Pakistan with particular focus on SMEs of Pakistan is discussed. In Part-3 of this paper, an effort has been made to highlight the reasons of downfall of SMEs in Pakistan especially in the last 3 to 4 years. This work can be further extended by incorporating in detail the stance of monetary and credit policies in different eras of SMEs history in Pakistan, SBPs role in the growth and development of SMEs, while reviewing its successes or failures in achieving its objectives. By inlarge, this document does provide a clear understanding as to what SMEs are? What role is played by SMEs in the economic prosperity and development of country? What is the present state of SMEs in Pakistan and , ofcourse, the reasons of their under performance in the past 3 to 4 years? This document also provides a detailed account of steps and actions taken by the State Bank of Pakistan We are glad that all members of Group-1 MBA 19-A, have come up with this paper by skillfully presenting different dimensions of such a dynamic and prestigious institution i.e. SBP and about the most important business sector of our country i.e. SME. Although this document is still a small piece of work, yet it can serve as an orientation manual and a useful guide for the students of economics. We are quite confident that after reading this document the students will feel an enhanced sense of understanding about the subject,

PART 1 SME SECTOR

What are SMEs? As defined by State Bank of Pakistan, SME (Small and Medium

Enterprise) means an entity, ideally not a public limited company, which does not employee more than 250 persons (if it is manufacturing concern) and 50 persons (if it is trading / service concern) and also fulfills the following criteria of either a and c or b and c as relevant:a. A trading / service concern with total assets at cost excluding land and buildings up to Rs 50 million. b. A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million. c. Any concern (trading, service or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.

SME DEFINITIONS

SME Definition Small & Medium Enterprises are defined as follows, as approved in SME Policy 2007:Enterprise Category Employment (a) Size Paid Up Capital Annual Sales (c) (b) Up to Rs. 25 Up to Rs. 250 Million Million

Small & Medium Enterprise Up to 250 (SME)

SME Definitions used by various institutions in Pakistan Institution SME Bank Small Total Assets of Rs. 20 million Medium Total Assets of Rs. 100 million

Federal Bureau of Less than 10 employees N/A Statistics Punjab Small Fixed investment. up to Rs. 20 million Industries N/A excluding land and building Corporation Punjab Industries Fixed assets with Rs. 10 million excluding cost of land Department Entity engaged in handicrafts or manufacturing of consumer or Sindh Industries producer goods with fixed capital investment up to Rs.10 Department million including land & building State Bank of Pakistan An entity , ideally not being a public limited company, which (SME Prudential does not employee more than 250 persons ( manufacturing) Regulations) and 50 persons (trade / services) and also fulfills one of the following criteria: A trade / services concern with total assets at cost excluding land and buildings up to Rs 50 million. A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million. Any concern (trade, services or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements.

SME Definitions in Selected Asia Pacific Economic Cooperation (APEC) Member Countries Enterprises exporting up to US$2.5 Million a year are considered Small by the State Bank of Pakistan, Country Sector Employment Other Measures Manufacturing Less than 100 employees Australia Services Less than 20 employees Manufacturing Less than 500 employees Canada Services Less than 50 employees Varies with China Usually less than 100 Employees Industry Indonesia Less than 100 employees Manufacturing Less than 300 employees 100 million assets Wholesaling Less than 100 employees 30 million assets Japan* RetailingLess than 50 employees 10 million assets Services Manufacturing Less than 300 employees Korea Services Less than 20 employees Less than 75 employees (Different Less than RM 2.5 Malaysia Varies (for SMI) for Bumiputra Enterprises) million Philippines Less than 200 employees P 40 million assets less than S$12 Manufacturing million fixed assets Singapore Less than 100 Services employees USA Less than 500 employees

STATE OF SME s IN PAKISTAN

In the industrial development of a country the importance of the SME sector cannot be over emphasized. The SME sector is the backbone of Pakistans economy. The significance of their role is clearly indicated by various statistics. According to more recent estimates there are approximately 3.2 million business enterprises in Pakistan. Enterprises employing upto 99 persons constitute over 90% of all private enterprises to include trade, services and manufacturing; employ 80% of the non-agricultural labor force; and their share in the annual GDP is 40%, and approximately contributes 25 per cent to export earnings besides sharing 35% in manufacturing value added goods. However, unlike large enterprises in the formal sector, a small and medium enterprise is constrained by financial and other resources. This inherent characteristic of an SME makes it imperative that there should be a mechanism through which it may get support in different functions of business including technical upgradation, marketing, financial and human resource training & development.

SIGNIFICANCE OF SMES
SMEs are considered the engine of economic growth in both developed and developing countries, as they:a. Provide low cost employment since the unit cost of persons employed is lower for SMEs than for large-size units. b. Assist in regional and local development since SMEs accelerate rural industrialization by linking it with the more organized urban sector. c. Help achieve fair and equitable distribution of wealth by regional dispersion of economic activities. d. Contribute significantly to export revenues because of the low-cost labour intensive nature of its products. e. Have a positive effect on the trade balance since SMEs generally use indigenous raw materials. f. Assist in fostering a self-help and entrepreneurial culture by bringing together skills and capital through various lending and skill enhancement schemes.

g. Impart the resilience to withstand economic upheavals and maintain a reasonable growth rate since being indigenous is the key to sustainability and self-sufficiency. h. Research reveals that despite the lack of collateral, SMEs are a better credit risk, as the default rate of this sector is much below that of large enterprises (LEs). i. Throughout the world, SMEs have provided tremendous opportunities to financial institutions to design various tools for the sector's development (e.g. Program Lending Schemes, Credit Scoring, Venture Capital Financing, etc.). Then there are clusters, technology parks and industrial estates, all being fuelled by the dynamism and vibrancy of small and medium enterprises. j. Banking institutions, running on Islamic principles, are also experimenting with interest free financial instruments (e.g. Mudarabah, Murabaha, Ijarah etc.) for SME sector. The importance of this sector has been widely acknowledged all over the world in view of its success in sustaining high growth in countries like Korea, Taiwan, China, Vietnam and Thailand.

PART 2 ROLE & ACTIONS OF SBP TO BOOST SME

The Small Medium Enterprises have played key role in development of economies like Japan. It has also been playing key role in providing impetus to the development of some of the worlds best economies like Taiwan, Korea, Hong Kong and China. Countries in South America and India have also been concentrating their efforts in developing the SME sector. Pakistan in not an exception to this, as both the Government of Pakistan and the State Bank has been trying to give impetus to their efforts aiming to develop SME sectors in Pakistan. So far, the central bank has taken a number of initiatives for the promotion of SME financing and development in the country. Some of the remarkable steps and actions are appended as under: In this regard government has restructured and established the key support institutions for SMEs such as SMEDA and SME Bank. The State Bank has already drafted draft Prudential Regulations for the SMEs, which are likely to be made operational shortly. Once these are made operational they would go a long way in developing the skills / mind set in the commercial banks for financing to SMEs. For this purpose the SBP has also asked the banks to establish dedicated departments for handling the SME financing requirements. With the establishment of SME Bank, it is perceived that this bank will become a beacon for financing to the SME sector. The SME bank was conceived as a leader in developing the program lending, to be developed as a model. Other banks desirous to provide lending to SME sector can then use these models. For the purpose of facilitating credit decision, the SBP is also contemplating to set up Credit Information Bureau in the private sector for collection/compilation of data on the credit history of SMEs, which will ultimately improve the credit risk appraisal capacity of the banks and reduce the non performing loans.

The launching of a Pilot Program for Training and Development of SMEs in Pakistan under the aegis of Standard Chartered Bank and International Finance Corporation of the World Bank at Lahore Chamber of Commerce and Industry.

This program i.e. Pilot Program for Training and Development of SMEs, will provide small and underserved SMEs with innovative banking products; help develop their skills in critical areas such as business planning and product marketing; and will also provide them with business mentors..

The SBP has also urged the commercial banks to increase financing to SMEs, especially small entities, enabling the SME sector to play its due and critical role in the economic development of the country.

The State Bank has allowed commercial banks to lend up to Rs 3 million to SMEs without collaterals and is encouraging them not only to introduce cashflow based methodologies instead of relying on the traditional collateral based lending but also to come up with innovative products and cost effective delivery channels to increase outreach for small enterprises.

The State Bank is also working for capacity building of banks through launch of SME Finance Grass Root Cluster Training Program for credit officers based in SME Clusters that include Lahore, Sialkot, Gujranwala, Rawalpindi, Peshawar, Quetta and Karachi.

Similarly, the central bank is also working on devising a Credit Guarantee Fund for Small & Rural Enterprises with the help of DFID, UK.

FORMULATION OF PRUDENTIAL REGULATIONS FOR SMEs BY SBP Keeping in view the important role of Small and Medium Enterprises (SMEs) in the economic development of Pakistan and to facilitate and encourage the flow of bank credit to this sector, a separate set of Prudential Regulations specifically for SME sector has been issued by State Bank of Pakistan. This separate set of regulations, specifically tailored for SMEs, is aimed at encouraging banks/DFIs to develop new financing techniques and innovative products which can meet the financial requirements of SMEs and provide a viable and growing lending outlet for banks/DFIs. The amendments made in the Prudential Regulations for Small and medium Enterprises (SMEs) Financing during January 31, 2009 to January 31, 2011 have been incorporated to update the existing version for ease of reference of the users. The Prudential Regulations for SMEs Financing covers Risk Management (R) aspects. The Prudential Regulations for Corporate/Commercial banking may be referred to for areas concerning Corporate Governance (G), Customer Due Diligence and Anti Money Laundering (M), and Operations (O) aspects, However, in case of international operations, the Prudential Regulations of host country shall prevail. State Bank of Pakistan will closely monitor the situation on an ongoing basis and work proactively with banks/DFIs to make SME financing a success. During this process, the SBP will keep on reviewing regulatory framework to ensure that any impediment is immediately removed while ensuring that banks/DFIs observe due prudence and necessary oversight. The Prudential Regulations for Small and medium Enterprises (SMEs) do not supersede other directives issued by State Bank of Pakistan in respect of areas not covered here. Any violation or circumvention of these regulations shall render the bank/DFI/officer(s) concerned liable for penalties under the Banking Companies Ordinance, 1962.

SME FINANCE DEPARTMENT

Introduction of Department A separate Department for promotion and Development of SMEs was established in September 15, 2007, with the objective to undertake renewed efforts in the area of Strategy Development and implementation of related assignments, in order to support promotion of Finance to SMEs. The Department was established to focus on providing an enabling regulatory framework for SMEs, assessing their credit needs, capacity development of Banks/DFIs and awareness building through seminars/conferences to achieve the desired objectives, along with the promotion of financial services for export led industrial growth. In July 2008, as a result of the re-organization, the Refinance Division of Microfinance Department was also merged into the SME Finance Department. The Department has two divisions, SME Finance Division and Refinance Division. Mission Statement Development and promotion of an enabling regulatory framework, accompanied by effective measures to focus on capacity development of financial institutions, spreading awareness about SME finance, and contributing effectively towards exports. Vision Statement Creation of an integrated inclusive Financial System corroborated by effective regulatory measures, aimed at bringing SMEs and exports led industrial sectors into mainstream macroeconomic framework, with ready access to both formal and incentivized sources of Finance.

SME Finance Division This Division is responsible for improvements in SME Policy and Regulatory framework through appropriate measures and Special Initiatives, in order to promote and develop SME Finance in the country.

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Refinance Division This division is responsible for formulating and implementing short and long term credit schemes on concessional terms for the promotion of exports of the country. Further, it also oversees the flow of banks' credit for commodity operations and to Public Sector Enterprises (PSEs) and Autonomous Bodies (ABs). Major Departmental Goals Working for improvement in SME Policy and regulatory framework through appropriate measures/special initiatives. Planning and executing Capacity Building measures for Banks. Publication of Quarterly Review. Acting as the secretariat for SME Credit Advisory Committee (SMECAC). Formulation & implementation of credit schemes on concessional basis to promote the exports. Monitoring of the flow of banks' credit to PSEs and for commodity operations.

Key Departmental Objectives Promotion and Development of SME Finance. Capacity Building of Financial Institutions. Promotion of Exports of the country. Effective Coordination/Communication with key stakeholders.

Effective monitoring of Banks Credit to PSEs/ABs and for commodity operations.

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SME FINANCING PRODUCTS BOOKLET BY SBP

State Bank of Pakistan has been endeavoring for the improvement of development finance in the country with special focus towards SMEs. An increased flow of finance in SME sector coupled with enhanced credit exposure is a driving theme for the regulators to achieve the targeted inclusive growth. One of the major constraints hindering a smooth flow of finance to SME sector has been the non-availability of organized financial information with regard to the various products being offered by the banks. The publication of this booklet (a total of 40 pages tabulated information), offers all the required basic information about the sector specific products offered by different banks. This booklet would allow the financial education of SMEs and would also help them to make more informed decisions. This document has been published with the intention of general information and assistance of SMEs and entrepreneurs with regards to contact accessibility, products, services, and prices offered by various institutions. Some of the important details are as under: Right Product for the Right Purpose Commercial Banks Financing Products Islamic Banks Financing Products Import/Export Related Products Contact Information/Designated Branches

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SME BANK PROFILE

Status and Nature of Business SME Bank Limited was established pursuant to the Regional Development Finance Corporation (RDFC) and Small Business Finance Corporation (SBFC) Amalgamation and Conversion Ordinance 2001. The Bank obtained its business commencement certificate on April 16, 2005 which became effective from the date of its issue. The Bank is now a Scheduled Commercial Bank engaged in the business of banking with the primary objective to support and develop SME sector in Pakistan by providing necessary financial assistance and business support services on a sustainable basis. The Bank is operating through a network of 13 Commercial banking branches. In terms of the provisions of the State Bank of Pakistan regulations the Banks are required to increase its paid-up capital (net of losses) to Rs 6 billion by 31.12.2009. The paid up capital of the Bank as of 30.09.2009 (net of losses) stands at Rs. 2.126 billion. State Bank has however exempted the Bank from minimum paid up capital requirement till its privatization. SME Banks Head Offices presently situated at Islamabad. Government has decided to shift the Head Office of SME Bank to near a major business/commercial city. All major divisions are based at Islamabad except Treasury office which is situated at Karachi. Amalgamation of defunct RDFC and SBFC The Federal Government promulgated the Regional Development Finance Corporation (RDFC) and Small Business Finance Corporation (SBFC) (Amalgamation and Conversion) Ordinance, 2001 (the Ordinance 2001) setting forth the mechanism of amalgamation of defunct RDFC and SBFC. Both these entities were Development Financial Institutions (DFIs). Pursuant to this scheme entire assets and liabilities of defunct RDFC and SBFC as at December 31, 2001 were transferred to the Bank at fair value. These two institutions stand dissolved and ceased to exist effective January 01, 2002.

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Financial Restructuring The Government of Pakistan (GoP) assisted by Asian Development Bank (ADB) is working on SME Sector Development Program (SME SDP). SME Bank is also part of said program and is under restructuring phase since 2004. The major areas of restructuring of SME Bank include closure of recovery branches of defunct SBFC and RDFC, Human Resource audit, Training of employees, rationalization of staff, collection of loan portfolio of defunct RDFC and SBFC and building of Banks own/new portfolio. SME Leasing The leasing division of SME Bank was separated in 2003 and SME Leasing Ltd a wholly owned subsidiary of Bank was launched in 2003 with a capital of Rs. 200.0 million. SME Leasing with its head office in Karachi is operating from 7 cities with 9 branches. During August 2006 SME Leasing increased its share capital by another Rs.100.0 million through public offering. SME Leasing assets stand at Rs. 1,979.9 million with equity of Rs. 410.6 million as at December 31, 2008. All the directors on its Board are nominees from SME Bank Out of total 7 directors 4 are form industry and 3 directors are the executives of the Bank. Portfolio Analysis SME Bank inherited a portfolio of Rs.14,485 million (principle & markup) from defunct RDFC & SFBC in 2002. Apart from recovering the old portfolio the Bank developed its own loan portfolio with specific focus in SME sector. As at September 30, 2009 the old portfolio stand at Rs. 9,001 million (principle & mark up) and SME portfolio stands at Rs. 2,483 million including mark up. Disbursements made from January to September 2009 are Rs. 1,513 million and recoveries of Rs. 630 million were made. Recoveries include Rs. 494 from SME portfolio and Rs. 136 million from old portfolio. NPLs of SME portfolio stand at 20.64% as at September 30, 2009. Old portfolio is fully provided for. Government has decided to

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outsource the recovery of old portfolio of SBFC & RDFC to National Bank of Pakistan. This will be effective from 01.01.2010. Investments Banks total investments are Rs. 2,749 million. It includes Rs. 2,442 million in Government securities like PIBs and T-Bills. The other investments include money market placements, CoIs and clean placements. PRODUCTS 1. Lending Products. Any commercially viable business proposal merits SME

Bank's support. It is Bank's effort to assist and support enterprises that use indigenous raw material, add value and are export oriented. Such enterprises are vital to our economy since these are labor intensive and thus create employment opportunities. SME Bank is reaching out to small and medium entrepreneurs through: Smart Loan Facility Asset Finance Running Finance Leasing through its subsidiary

2. Banking Products SME Bank's QATRA QATRA DARYA (Daily Product Basis) SME Bank's QATRA QATRA DARYA (Saving Account) SME Bank's QATRA QATRA DARYA (Current Account) Mahaana Aamdan Account Current Account PLS Saving Account SME Rozana Izafa aur Mahana Munafa SME Regular TDR SME Fixed Term Deposit Profit payable on Maturity Basic Banking Accounts

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THE SME DEVELOPMENT AUTHORITY SMEDA Introduction Premier institution of the Govt. of Pakistan under Ministry of Industries and Production, SMEDA was established in October 1998 to take on the challenge of developing Small & Medium Enterprises (SMEs) in Pakistan. With a futuristic approach and professional management structure it has focus on providing an enabling environment and business development services to small and medium enterprises. SMEDA is not only an SME policy-advisory body for the government of Pakistan but also facilitates other stakeholders in addressing their SME development agendas. In this regard a "SMEDA Ordinance was also promulgated by President of Pakistan on August 12, 2002. SMEDA Vision "Growth of globally competitive SME sector, through a conducive environment and support services, serving as an engine of sustainable growth for national economy" Mission Statement To function as the promoter & facilitator of SME sector in Pakistan by creating a conducive and facilitating environment as well as providing and facilitating service delivery to SMEs for enhancing their capacities and competitiveness. SMEDA Objectives Formulate Policy to encourage the growth of SMEs in the country and to advise the Government on fiscal and monetary issues related to SMEs. Facilitation of Business Development Services to SMEs. Facilitate the development and strengthening of SME representative bodies associations/chambers. Set up and manage a service providers database including machinery and supplier for SMEs. Conducting sector studies and analysis for sector development strategies. Facilitation of SMEs in securing financing.

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Strengthening of SMEs by conducting and facilitating seminars, workshops and training programs. Donor assistances for SME development of SMEs through programs and projects. Assist SMEs in getting international certifications (such as UL, CE, DIN, JIS, ASME, KS, etc.) for their products and processes. Identification of service opportunities on the basis of supply/demand gap.

POLICY AND PLANNING DEPARTMENT Role of Policy & Planning Department Policy & Planning Division of SMEDA has dual focus i.e. internal & external. It plays a key role in devising and coordinating policies, action plans and strategies for SMEDA operations. On the other hand it has a mandate to carry out research, communicate with stakeholders and advocate policies with different tiers of the government with an ultimate objective of creating a conductive business environment for SMEs in Pakistan. P&P is the hub of policy and regulatory research that provides SME specific policy input to all tiers of government, government agencies and institutions, SME associations, industrial clusters and individual entrepreneurs. RO LE O F SM E DA SMEDA is the flagship organization of Pakistan which is providing the necessary services to help SMEs overcome the weaknesses that are endogenous to their very nature. It is an autonomous body working under the umbrella of the Ministry of Industries & Production and contributes towards the growth and development of SMEs in Pakistan through: the creation of a conducive and enabling regulatory environment; development of industrial clusters; and the provision of Business Development Services to SMEs in all areas of business management.

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Adhering to a clear mandate and a logical path to achieve quantitatively verifiable targets, SMEDA carries out comprehensive analyses of international trends, national policies and other macroeconomic factors affecting SMEs in Pakistan for a gradual progress towards the creation of a favorable business environment for its key clients the SMEs of Pakistan. At the same time, the representatives of SMEDA also interact with the SMEs working in industrial sectors such as Agriculture, Fisheries, Textiles, Handloom Weaving, Transport, Leather, Marble & Granite, Carpets and Light Engineering. This interaction takes place at the individual as well as collective level to provide proactive and responsive financial, technical, management and marketing services to SMEs. At the collective level SMEDA addresses the problems and needs of SMEs in the form of an industrial cluster a concentration of largely homogenous enterprises within a certain geographical area. SMEDA interacts with the stakeholders operating in such clusters on a regular basis and collects first hand information about their problems and needs. During this interaction, the issues are prioritized and the important problems are selected for detailed working through which the projects/programs are identified. SME support through cluster development program is provided on two fronts: Regulations and policy level support. Institutional & networking support.

In the policy level support, problems related to any Government department or Government policy/regulation are studied and, if found valid, are advocated with the concerned authorities. At the institutional level, SMEDA provides support to SMEs by creating networking amongst the concerned stakeholders or by directly starting development projects in the clusters. Such projects may include establishing a training institute, building a common facility centre, building a model plant with state-of-the-art technology for SMEs to emulate through reverse engineering. These projects also include upgrading technology in a particular industrial sector and starting a program-lending scheme for this purpose in collaboration with the financial institutions.

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Uptill now, SMEDA has been involved in cluster development projects in the areas of Boat Modification in Marine Fishery Sector, Credit for Auto Vendors, Carpet Weaving, Marble & Granite, Dates & Apples Processing, Wooden Furniture, Leather Garments, Ceramic Kilns, Cotton Ginning, and Glass Bangles Cluster. Some of the important cluster development projects undertaken by SMEDA are: Textile/Apparel Ginning Technology Up-Gradation Program Lending For Power Looms Computer Aided Design Centre (Common Facility Centre-Sialkot) Designing Institute for Garments (Peshawar) Accessories Sector Study Development of Handloom Cluster Horticulture/Fruits and Vegetables Establishment of Cool-Chain Agriculture Export Processing Zone Fruit Processing Facility (NWFP in Collaboration with EPB) Assistance to Set Up Horticulture Export Board Revitalization of Sunflo Cit-Russ for Citrus Cluster Development. Apple Treatment Plant in Balochistan (Co-Ordination with EPB) Fisheries Program Lending Boat/Engine Modification, Gwadar District Establishment Of Shrimp Farms Fish Processing Facility In Gwadar (Feasibility Study) Granite & Marble Export Warehouse Marble (Azakhel NWFP) Establishment of Model Quarry and Training Institute Marble Joint Ventures and Technology Transfer Arrangements (NWFP) Gems Five New Gem Mines To Be Operationalized (NWFP) Lapidaries Program Lending (NWFP) Glass & Ceramics Ceramics Kiln Up-Gradation: Common Facility Centre, Gujrat Sanitary Ware & Pottery Sector Kiln Up-Gradation Bangles Kiln Up-Gradation (Hyderabad)

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Agriculture Agri-Mall One Stop Shop for Agriculture Inputs Support Services for Agricultural Credit (SSAC) Establishment of 3 Private Sector Warehousing & Trade Promotion Facilities in Afghanistan

Provision of Business Development Services. The third area of SMEDAs functioning is the provision of Business Development Services to SMEs. For this purpose we have set up Helpdesks in all four of our regional offices where any SME in need of SMEDAs services can simply walk in and obtain over the counter products such as Project Briefs, Pre-feasibility Studies and Regulatory Procedures, along with advice on specific problems. SMEDA Helpdesk Services include: Assistance in Raising Finance. Financial Advice. Project Identification. Business Plan Development. Technical Advice. Marketing Advice (Branding, Labeling, Packaging, Distribution, Promotion, etc.) Company Incorporation, Export Registration, & Regulatory Advice. Sales Tax, Custom Duty, Excise Duty, etc. Electronic Commerce Support. Business Matchmaking. Accounting & Bookkeeping Services. Information Services (Library, Databases, Project Briefs, Pre-feasibility Studies, Business Guidebooks). As a part of its Business Development Services, SMEDA also provides Human Resource Training services by conducting extensive training need analysis of different SME clusters. SMEDA has so far conducted more than 230 training courses and workshops focusing on developing sector specific skills.

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SME POLICY Promotion of SMEs has been the center piece of Governments strategy for economic revival, poverty alleviation and employment generation. To this end, the logical first step was the formulation of a comprehensive SME Policy reflecting the viewpoints of multiple stakeholders. The Federal Cabinet of Pakistan was pleased to approve SME Policy on January 17, 2007. The approval of SME Policy ushers in a new era of focused SME development initiatives necessary for this sector to realize its true potential and contribute towards economic development. The Government of Pakistan thus constituted an SME Task Force, by Notification No.1(68)/2003-Inv-III of 29 January 2004 of the Ministry of Industries and Production. SME Task Force included both public & private sector members. In order to enable the SME Task Force to work effectively, four Working Committees were setup to carry out technical analyses, deliberate findings and address following core issues: i. Business Environment. Creating a favorable business environment for SMEs in Pakistan's economy and eliminating unnecessary obstacles, reducing cost of doing business. ii. Access to Finance. Increasing SMEs access to formal finance to include equity financing while addressing the question of lacking documentation and banks technical capabilities and improving SMEs capacity to become eligible to get formal financing. iii. Access to Resources & Services. Improving the delivery mechanisms for assistance and access to resources for SMEs in Pakistan an, inter alia business development services, qualified human resources, marketing and technology, so as to improve their competitiveness, productivity and capacity for employment generation. iv. SME Definition, Feedback, Monitoring & Evaluation Mechanism. Establishing appropriate and harmonized definitions for Pakistan of what are to be categorized micro, small, medium, and large enterprises. Furthermore, the establishment of a sound mechanism by which development of the SME sector and effectiveness of assistance provided to SMEs can be monitored.

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Objectives of SME Policy The broader objectives to be achieved by SME Policy as contained in this document are; Across the board recognition of SMEs as a sector requiring separate policy & regulatory space. Define SMEs that qualify for support, propose counterbalancing measures to eliminate disadvantage of size, Remove unnecessary regulatory burden, Institute SME support mechanism in both public & private sectors, Improve support delivery mechanisms and establish policy evaluation and review systems. Specifically the Policy envisions increasing the share of manufacturing small enterprises from 5.5% to 7%, while decreasing the threshold and density of regulations thereby reducing the cost of doing business. It also sets the target of increasing the share of SMEs in value added production to 40%, and women ownership to increase to 6%. A number of measures are proposed to achieve these objectives including setting up SME support funds and creating a mutually cooperative & facilitative, hassle free business environment. The Policy also contains outline of a monitoring mechanism at the Federal & Provincial levels to oversee and assess impact of SME development initiatives being implemented under the Policy.

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PART - 3

PROBLEMS FACED BY PAKISTANS SME SECTOR

Pakistan's economy has amazing potential for development but sadly, we haven't been able to derive optimal benefits despite a series of efforts launched by various policy makers at different times. The impetus of all these endeavors was on the large scale industries and manufacturing concerns. High rate of failures, owing to economic slumps, institutional malpractices, political motives and damaging activities of labor unions in that sector, left the formal lending institutions with huge infected portfolios, in addition to adverse effects on the entire economy e.g. insufficient and low quality production to meet the demands of local and international markets, deficit in balance of payments and ever rising unemployment, etc. The major hurdles in the way of development of SMEs in Pakistan are; lack of skilled labor, outdated technology, weak governance, lack of management hierarchy, absence of book keeping, and taxation issues coupled with limited access to formal sources of finance. If SMEs are broadly bifurcated into M and S categories, we find that entities under M have had easy access to finance as compared to those under S, the synopsis of SME Finance also reflects that out of total SME portfolio of Rs. 383 billion, only 38.3 per cent is being channeled to entities having less than 20 employees. This depicts that the focus of financial institutions has been on medium entities, and the primary reason for this skewed distribution was the unorganized way of doing business by small entities. It may be reiterated that in line with other developing countries, the SME sector in Pakistan also, do not have adequate access to financing from the formal sector and has been primarily relying on the credit facilities from the informal sector, at a cost even higher than the cost paid by those borrowers from SME sector who are able to avail facilities from the formal sources like banks. One basic reason for reduced access to financing from banks by SME borrowers has been inadequate regulatory environment, in the absence of which banks are forced to evaluate the financing requests from prospective borrowers under the existing prudential regulations which are basically driven by their requirements for lending to corporate sector.

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Pakistans SMEs are still unable to achieve their maximum potential and are in dire need of hand-holding' and business support services. Most of the developing economies consider SMEs as the backbone for the growth. Pakistani economic managers including the central bank have the same perception but the growth in SME sector has been in reverse direction at least for last three years as banks lending to Small and Medium Enterprises (SMEs) has been falling despite all efforts made by the State Bank, while its` role is shrinking instead of growing in the economy. The banks` lending to SMEs has declined in the last three years i.e. bank credit to SMEs has declined from Rs437 billion in 2007 (16 per cent of bank advances) to Rs334 billion in Dec 2010 (10 per cent of advances) showing a huge decline in real terms at a time when input prices had risen sharply pushing up demand for working capital credit. The prevailing profitable risk-free situation does not move banks to take pain for the development of SMEs despite the fact that these are essential for long-term growth of economy as well as banks.

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The risk aversion of commercial banks is restricting access of the small and medium enterprises to credit, constraining the sectors growth at the expense of job creation. The credit flow to the SMEs has been falling since 2008 because of banks reluctance to lend money to this sector especially the smaller entrepreneurs, with the entire SME financing eventually dropping to just outstanding amount of Rs303bn or 8.6 per cent of the total bank lending at the end of third quarter of the last fiscal to March from an average of 16-17 per cent a few years ago. The total outstanding SME credit, according to the State Bank of Pakistan, dropped by five per cent in nine months from Rs319bn in June 2010 and down by almost 25 per cent from the peak of Rs400bn in 2008. The small to medium businesses have been hit hard by the banks aversion to risk and their growing tendency to invest in the governments commodity operations and securities for over more than last three years. Resultantly, the credit flow to this sector is declining at a time when it badly requires money to sustain through the current economic slump. Deteriorating macroeconomic conditions, growing energy shortages and soaring utility costs have pushed the cost of doing business enormously high for the SMEs. The SMEs, particularly the smaller businesses, are in a dire need of cash to sustain through the current period of economic stress, but the banks are not helping them. The number of SME borrowers has come down significantly to 197,808 constituting only about 5.2 per cent of the total number of the borrowers of the banking industry, from the peak of over 225,000. This reduction in the number of SME borrowers is not due to a lack of demand for credit. It has come down because the banks are not lending to them at all. According to banks, reduced lending to the SMEs pertains to the sectors rising portfolio of nonperforming loans (NPLs), which rose to Rs101 billion by the end of March 2007, due to rising cost of borrowing, growing energy shortages, soaring inflation and worsening security situation.

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The SBP Data on SME Lending (up to March 2011)- Conclusions This data depicts that banks lend more generously to the trading firms whose share in the SME loan portfolio stood at 44.1 per cent as compared to the 38.8 per cent share for manufacturing units and 17.1 per cent for the services outfits. The data also show that the SMEs usually borrow from the banks to meet their short-term working capital needs rather than for long-term fixed investments. The total SME outstanding amount shows that the dominating share of about 76.1 per cent was availed by the SMEs under the category of short term financing of up to one year while the share of long- and medium-term financing was 15.5 per cent and 8.4 per cent respectively. The banks have never felt comfortable in lending money to the SMEs, particularly smaller ones in the manufacturing sector, inspite of a number of initiatives taken by the SBP over the years. This is because the banks have not developed the capacity for making clean lending. They prefer collateral-based lending because it is easier and does not require development of special products. The SBP data corroborates this viewpoint as it shows 97.8 percent of financing is made against collateral while only 2.2 per cent of the SME outstanding amount is provided as clean lending. The meager share under clean lending reflects the banks mindset of relying on security or collateral while lending to the SMEs, a lack of innovative products and the borrower evaluation techniques whereby their repayment capacity is judged through business and cash flows assessment instead of asset or collaterals, according to the SBP. The medium sized enterprises with collateral to pledge with the banks have seen some improvement in obtaining funds from the banks over the years. But the small enterprises access to finance has deteriorated. These enterprises fund their working capital and new investments from their savings or borrowings from friends and relatives or from the informal sector at a very high price. The credit demand gap is rising for smaller and micro enterprises and is estimated to be more than Rs25bn now and is leading to business failures and closures in the SME sector.

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References & Sources www.sbp.org.pk SME Bank SMEADA SME POLICY SBPs Prudential Regulations SMEs Guide Booklet SBP Governor Shahid Kardars address at a conference on SME Banking in Pakistan: Global/local trends and role of value-added services, in the year 2010. Syed Salim Raza, Governor, State Bank of Pakistans interview on March 24, 2009.